The Private Lending Twist

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In my most recent blog post, a reader dutifully acknowledged that some States require private lenders obtain a license to make private loans. If your business resides in one of those States, I say, follow the rules and get whatever license your State requires. Always check with your legal counsel and find out the rules of engagement…then go make good returns being secured, just like a bank.

The Alternative…

This a secret…so keep it to yourself! Make a ‘loan’ that looks, tastes, smells like a private loan but is not a private loan. For the one who says, “you can’t do that”…(…if I had a penny for every time someone told me I can’t do something…) I have used this strategy several times in my own business and my legal counsel has OK’ed it. (Be sure to check with your own legal counsel and see if this works in your area.)

In a nut shell, while the Purchase and Sale Agreement document is in your ‘borrower’s’ name, they assign their property to you at the closing table using a simple Assignment of Deed of Trust document. You then immediately sell the property back to the ‘borrower’ at a higher price(which equates to what your loan point fees would have been) with a longer closer date, say 6 – 12 months. Use a garden-variety Purchase and Sale Agreement or a Real Estate Contract – depending upon your State law, to resell the property to your ‘borrower’. Your ‘borrower’ will only record that document if you, as the now Seller dies, becomes incapacitated, or becomes unethical.

Then, give your borrower an Early Entry Access document which will allow them to enter the property you sold them to make improvements. Ensure this document has a monthly ‘rent’ clause which is paid to you which equates to the interest you would have charged the ‘borrower’ if you would have made him a loan. Upon completion of the improvements, your ‘borrower’ will list the property and sell it. Remember, you will have to sign the listing agreement and deal with the buyer’s agent and closer because you are still vested as owner.

At closing, you instruct the closer to cut two checks – one to your ‘borrower’ who also gets a 1099 IRS form, and two, to you for the principle and remaining ‘rent’ owed. Granted, you have got to have a positive relationship with your borrower and be in good standing in the local community so your borrower will know you won’t take their property and run.

Personally, I use this strategy when I cannot make my borrower a loan. Sometimes a borrower comes to me who recently just got out of a BK, bankruptcy, or who has tax liens, or who has large judgments. Instead of passing on what I deem to be a good deal, I use this strategy. As you know, if a person who has one of these issues, buys real estate, that tax lien or judgment attaches itself to that buyer’s property. Because, the law says the lien or judgment will get paid before the buyer takes any profit. So, the buyer cannot take title to the property.

The Takeaway

Just because your borrower does not qualify for a loan or you don’t have a license to make a loan, you can still do business with your ‘borrower’.

To Your GOOD Wealth!

Photo: propertysnaps

About Author

Lee is a private lender with over 15 years of personal experience in the real estate industry. He teaches the everyday investor how to stop thinking like an investor and how to start thinking like a Banker by reviewing and creating cashflow-secured promissory notes that create double-digit returns.


  1. In Pennsylvania, there is a 2% transfer tax each time the title is transferred. It’s usually split between the seller and the buyer. Some municipalities also levy an additional transfer tax of their own. This strategy would be very expensive in Pennsylvania.


    • Yes it could be Joe. However, there is one title transfer, from the ‘borrower’ to their seller. The assignment is not a transfer in my State from what my legal counsel says. I know in my State there is a 1.78% fee on all sales, but not assignments. If there is a large fee for assignments as well, you may need to alter the strategy a little.

  2. Lee:

    Buhrillant. My father taught me, “. . .look for the cracks and fissures, therein lies the power.” This is a beautiful and workable crack for those flippers or potential partners who would otherwise not qualify, and for that, thank you.

    You have a fan!


  3. Joe, if I’m reading the article right, the rehabber does not take ownership of the property unless something happens to the “lender”.

    Lee, it seems like another way you could make it work is to purchase the property and have an agreement that the rehabber will fix up the house in exchange for some (or all) of the profit on resale, and the rehabber gets to put a lien on the house for the amount of the expected profit. In your method, if something happens to you as the “lender”, it sounds like the rehabber has to actually buy the house, which may not be possible. In my method (which granted I’ve never done and thus I don’t know all the potential issues), the rehabber simply has a lien on the house that has to be paid before the house is sold, and worst case is just out some time (assuming the costs were all covered by you as the lender). What do you think? Maybe you could also do a JV agreement or something like that.

    • Nice twist to the strategy Mike…a mechanic’s lien. At first glance, I think that would work well. I like that idea with one exception, you loose some control as a ‘lender’. As I write about in my book, any time I have lost money, I have given up control of the process or investment.

      If I died, the ‘borrower’ has a contract saying I will sell the property to him at X price on X date. He would have to buy the property. However, if he rehabbed the property and sold it within the preestablished time frame, he may not have to buy the property.


    • Wow Daniel, even on assignment? That is too bad. So, put some grey matter into making this strategy more profitable. The ‘borrower’ could make the offer in your name, or the name of an LLC of which both of you are members.


  4. Kelvinia Sambula on

    Can this be done in California? I don’t understand if I would be the borrower to my a resident to live in or buying on your behalf and earning an income or buying to invest in properties too using hard money loans! Please advice.

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